On November 21, 2011, the Congressional “Super Committee” charged with finding deficit reduction plans announced that they were unable to reach agreement. Rumors had circulated that the Committee was going to reduce the existing $5 million federal estate and gift tax exemption (indexed for inflation to $5.12 million in 2012). With their failure to act, the $5 million exemptions remain in effect until January 1, 2013. If Congress doesn't act before December 31, 2012, the $5 million exemptions are scheduled to revert to $1 million on January 1, 2013.

We recommend that clients take advantage of the current law by making strategic gifts prior to January 1, 2013. We view the failure of the Super Committee as an extension of our clients' window of opportunity to make tax-efficient gifts now.

Our Top Recommendations

Our top gifting recommendations right now include:

• 1. Spousal Lifetime Access Trusts (SLATs)—A SLAT is an irrevocable trust that one spouse establishes for the primary benefit of the other spouse. However, the assets of the SLAT are removed from the estate of both spouses and SLAT assets are available to one spouse and can ultimately be distributed to children and grandchildren.
• 2. "Capped" Gifts to Children—This strategy involves making current lifetime gifts to children, outright or in trust, coupled with a "cap" in the parents' will or revocable trust on the children's inheritance at a certain dollar amount, with the balance passing estate-tax-free to a public charity, a donor advised fund, or a family private foundation.
• 3. Family Limited Partnerships—Family Limited Partnerships (FLPs) are a strategy that can leverage the available gift exemption and permit senior generations to continue to manage strategic family assets. If there is a sound business purpose for holding assets in a partnership with multiple family members as partners, and business formalities are followed, the use of FLPs may allow families to leverage the gift tax exemption by discounting the value of the partnership assets upon transfer of partnership interests to family members—discounts that may not be available in the future.
• 4. Loans and Promissory Notes—Outstanding loans or promissory notes from children or trusts for children that were created in prior years can be forgiven currently using some of the available gift tax exemption.
• 5. Business Succession Planning—Gifting larger amounts of non-voting stock or LLC interests in closely held businesses to children or to trusts for their benefit can be part of an overall business succession plan.
• 6. Irrevocable Life Insurance Trusts (ILITs)—Life insurance policies owned by an ILIT can be front-loaded with cash value, reducing the premium payment obligation in future years and allowing the policy proceeds to pass to beneficiaries free of estate tax.
• 7. Low Interest Rates—Minimum mandatory interest rates are currently at all-time lows, which enables new intra-family loans at attractive rates. A loan at a low interest rate to a trust can be a good way to use the difference between interest rates and investment performance to fund trusts such as Life Insurance Trusts.

Gifting Is Not Just for the Ultra-Wealthy

Taking advantage of current federal gift tax laws is not just for the ultra-wealthy. Clients with estates below $10 million should consider using gifting strategies as well. Consider the following example:

An elderly Minnesota client living on Social Security with no debt and minimal expenses and with $1.5 million in investable assets will still be subject to Minnesota estate tax on death. The Minnesota estate tax exemption is still at the lower $1 million amount. However, unlike federal law, Minnesota has no gift tax. Therefore, making a large $500,000 gift shortly before death will save family members over $64,000 in Minnesota estate taxes. It could also save estate administration expenses in that no federal or Minnesota estate tax return need be filed for estates under $1 million. The estate tax savings may be offset to some extent by capital gains tax that could apply to the gifted assets upon liquidation. Of course, non-tax considerations for the client should be paramount. But making a timely strategic gift could save taxes and should at least be considered.